Chilean President Michelle Bachelet reshuffles her economic cabinet, again

On August 31st, President Michelle Bachelet (2006-2010, 2014-present) accepted the resignation of the Secretary of Finance, Rodrigo Valdés; the Secretary of Economic Affairs, Luis Felipe Céspedes; and the Undersecretary of Finance, Alejandro Micco. The cabinet members fell out of grace with the president after they opposed an Executive veto against Dominga, a proposed port-mining project in Chile’s mineral-rich northern provinces. Many Chileans viewed the $2.5 billion iron-ore project as an opportunity to boost the recent low levels of growth since the end of the commodity boom. But citing ecological concerns President Bachelet rejected the project, stating that “we need growth to go hand in hand with the environment.”

The resignation of the masterminds behind Chile’s fiscal policies sheds light on the strains that have marked Bachelet’s second government—particularly regarding economic planning—and marks another impasse within the government months before Chileans head to the polls to vote in November, an election the opposition is likely to score a win.

Chileans elected President Bachelet, a member of the Socialist Party, to a second term in office in 2014. Back then she was the ideal candidate for the detractors of the economic model Chile inherited from Augusto Pinochet’s 17-year dictatorship (1973-1990). The model, which consolidated during the governments of the center-left coalition, the Concertación (1990-2010), brought growth and a significant reduction in poverty, which currently stand 7.9% — turning Chile into an example to follow for other Latin American and Caribbean nations. But a chronic increase in inequality was the cost of Chile’s success story. Though the country’s Gini coefficient has steadily fallen since 2000, it remains at 50.5 (among the worst for OECD countries and just ahead of Mexico and the U.S.), according to a World Bank estimate. High levels of inequality—added to the lack of quality government services, particularly in education, health, and more recently, pensions—have led to mobilizations among the country’s youth. Public discontent peaked during the government of Sebastián Piñera (2010-2014), the first center-right politician to be elected president since Chile’s democratic transition, as student protests—aimed at improving the bad shape of public education and promoting universal gratuity in higher education—took over the country.

Bachelet, who ended her first presidency (2006-2010) with record-breaking approval ratings of 80 percent despite an economic recession, ran her 2013 campaign on a platform of structural reforms. The most important included an educational reform (including free higher education for 70 percent of low-income families), a tax reform to fund the educational reform, and a new constitution that would replace the authoritarian legacy of the 1980 Constitution (implemented by Pinochet).

Bachelet campaigned on the ticket of the Nueva Mayoría (New Majority), a coalition of parties that included the traditional parties of the Concertación (Christian Democrats, Socialists, the Party for Democracy and the Radical Party) and new members, most notably the Communist Party. Bachelet comfortably won the 2013 presidential election in a second-round vote with 62% of votes (former president Eduardo Frei Ruiz-Tagle, who won the 1993 presidential election with 58% of votes, held the previous post-transition mark). More important, Bachelet won with strong congressional backing. Her coalition controlled 56% of seats in the Lower House and 55% in the Senate, which enabled her to pass key pieces of legislation.

Bachelet’s second government was off to a promising start. Her allies exuded confidence (bordering on arrogance) after her election. One senator went so far as to declare that the time had come to undo the Chilean economic model.

Unfortunately for Bachelet, the country’s economy was about to experience a major downturn. Chile, alongside its regional neighbors, benefited from the 2000’s commodity boom. In the Chilean case, especially from 2005 to 2012, this translated to an increase in demand—and consequently of the price—of its main export: copper (48.5% of exports in 2013). The price of copper peaked at $4.5 per pound in 2011. The ensuing fall in the price of copper, currently standing at $3.1 per pound, has had a profound impact on the local economy. The shift in the copper market, combined with the ill-timed legislation and implementation of Bachelet’s Tax Reform (which increased uncertainty amidst a cooling of the economy), had a direct impact on growth: while Chile grew at 5.3% on average during her predecessors’ tenure (2010-2014), growth decreased to 1.9% during Bachelet’s first year in office.

Chile’s political troubles have worsened economic stagnation in the country. Starting in 2014, a series of corruption scandals shook the country, as public prosecutors unveiled illegal campaign financing schemes that benefited politicians and political parties across the ideological spectrum. Not even Bachelet escaped from public scrutiny, as prosecutors accused her daughter-in-law of being involved in an influence peddling corruption case that is currently under investigation. Bachelet’s approval rating drastically dropped following public outcry over the case and has never recovered (currently at 35% according to Adimark, a local pollster).

The political and economic situation forced President Bachelet to reshuffle her cabinet in an unorthodox fashion. In early May 2015, Bachelet announced in a live interview conducted by Don Francisco (known throughout Latin America for conducting Sábado Gigante), that she had asked for the resignation of her entire cabinet. She went on to sack Alberto Arenas, the intellectual author of her economic program and Secretary of Finance—who failed to foresee the magnitude of the economic decline—as well as the cabinet members in charge of political affairs. This was the first time that a Secretary of Finance failed to complete his tenure in office since the country’s transition to democracy in the early 1990s. Arenas’ replacement was the MIT-trained economist Rodrigo Valdés, while Jorge Burgos, a Christian Democrat, replaced Rodrigo Peñalillo (one of Bachelet’s closest advisors and another victim of corruption scandals) as Secretary of Interior.

The move signaled a major shift in Bachelet’s government, marking a step away from the discourse of structural change sought by the New Majority, and closer to the consensus of the Concertación-era governments.

Though the shift in Bachelet’s government was clear, it remained difficult to boost economic performance. From 2014 to 2016, Chile experienced low levels of economic growth, averaging 1.8 percent. The country’s foreseeable economic outlook is no more promising: the International Monetary Fund (IMF) predicts that the country will grow at 2.3% average during the next 4-years. The lack of growth led Bachelet’s economic team to prioritize new investments in the country. That is why the executive veto on the Dominga mining project, which had been actively promoted by Rodrigo Valdés, marked a break between President Bachelet and her economic team. Once it became clear that the president would veto the project, Valdés resigned from his post. His replacement is the embodiment of the cabinet swings that have marked Bachelet’s second presidency: former IMF-employee, Nicolás Eyzaguirre.

Though Eyzaguirre is a seasoned economist who has previously served in his current post, it seems unlikely that his nomination will help in Chile’s much-needed economic recovery. Not only is he the third individual to serve as Minister of Finance during Bachelet’s second 4-year term (itself a warning sign to investors), but also his tenure is soon to come to an end, as Chileans will head to the polls on November 19th to vote in the country’s general elections.

Chile’s poor economic performance during the last 4-years, added to the scandals that have involved key allies, as well as Bachelet’s inner-circle, will likely influence November’s vote. In last year’s local elections, which were commonly viewed as a measurement of midterm government performance, the center-right opposition coalition headed by former President Sebastian Piñera, Chile Vamos (Let’s Go Chile), comfortable outperformed the ruling New Majority.

Since the government cannot campaign on macroeconomic gains, it has opted instead to champion civil rights. In August, Bachelet’s government scored a major win after abortion became legal in certain cases—after a tough legislative process that culminated in a split vote by the country’s Constitutional Court. Last week Bachelet signed a bill that aims to legalize same-sex marriage. Yet, these efforts won’t necessarily translate into a victory in November. A poll published last week by the Center of Public Studies (CEP), Chile’s most trusted pollster, showed that former President Sebastián Piñera is leading with 39.8% of support among likely voters. Alejandro Guillier, a member of the incumbent coalition, trailed with 18.1% Guillier is statistically tied with contender Beatriz Sánchez, a renowned journalist running on the ticket of a new leftist coalition, the Frente Amplio (Broad Front), who received 17.9% of backing. The same poll concluded that Piñera would comfortably defeat either candidate in a second-round by at least a ten-percentage point margin.

It seems that despite significant gains on civil liberties, the bad shape of the Chilean economy (alongside the political turmoil that has marked Bachelet’s second presidency) will likely result in more change than continuity in the near future.

Lucas Perelló is a PhD student in Politics at The New School for Social Research. You can follow him on Twitter @lucasperello

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